Clearwater Bottling Company sells bottled spring water for $12 per case, with variable costs of $7 per case. The company has been selling 200,000 cases per year and expects to continue at that rate, unless it accepts a special order from Blue Danube Restaurant. Blue Danube has offered to buy 20,000 cases per year at $9 per case. Clearwater must agree to make the sales for a five-year period. Blue Danube will not take fewer than 20,000 cases but is willing to take more.

Clearwater’s current capacity is 210,000 cases per year. Capacity could be increased to 260,000 per year if new equipment costing $100,000 were purchased. The equipment would have a useful life of five years and no salvage value. Maintenance on the new equipment would increase fixed costs by $20,000 each year. Variable costs per unit would be unchanged. Clearwater has a marginal income tax rate of 25%. Inflation is estimated to be 4% over each of the next five years. The risk-free rate is estimated to be 5%. Clearwater can earn a rate of 12% if it invests in an alternative investment having similar risk.

Required:

A. Create a timeline showing the relevant cash flows for this problem.

B. Ignoring inflation, using straight-line depreciation over five years (ignoring the half-year convention), and using a 12% discount rate, determine the NPV if 20,000 cases are sold.

C. Ignoring inflation, using straight-line depreciation over five years (ignoring the half-year convention), and using a 12% discount rate, determine the number of cases Blue Danube would need to purchase to bring the NPV to zero.